Current Perspectives

Update on the Canadian Dollar

September 11, 2017

Three cheers for the Canadian economy. It had been the underdog among developed economies since oil prices peaked in 2014. Growth expectations were reduced based on the downturn in energy prices, and then reduced some more after the U.S. election, when President Trump barged in on the international scene with his declaration to tear up NAFTA. Yet the Canadian economy has turned out to be the "little engine that could." Stronger global growth has helped and is reflected in a stronger domestic expansion in the first half of 2017. Canada, with a growth potential estimated at 1.4%, grew 3.6% in the first quarter and 4.5% in the second. Jobs have been added at an average rate of 32,000 in the 12 months ending July, a much faster pace than the 13,900 jobs added in 2016 and the 9,500 in 2015. Export volumes have risen in the energy, merchandise and industrial-machinery sectors. Canada's blistering housing market, a perpetual source of worry, withstood a slew of macroprudential measures aimed at cooling it down, but with mortgage rates still low, household debts remain affordable. By 2017, Alberta oil companies had succeeded in reducing their operating and capital costs, and as a result break-even production prices have fallen by over 25% since 2014.

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Dagmara Fijalkowski, MBA, CFA
Head, Global Fixed Income and Currencies (Toronto & London),
RBC Global Asset Management Inc.


The Bank of Canada Hikes Rates: Part Deux

September 6, 2017

After a summer of strong economic data, capped off by last week's 4.5% GDP print, the Bank of Canada decided to hike rates yet again, moving to a 1.0% overnight rate and completely unwinding the extraordinary stimulus delivered in response to the oil shock in 2015. Key highlights include:

  • The market was mixed around whether a hike would occur today or in October.

  • The move is being deemed hawkish as a function of their decision to hike today rather than because of any specific language around future decisions. To us, this implies less certainty about future rate increases.

  • Looking forward, we think October is a possibility for the next round of hikes, but it would require further significant economic strength in the near-term. A more likely scenario is a December hike at the earliest.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


The Lowdown on the Loonie

July 31, 2017

The Canadian dollar (CAD) has appreciated 10% since early May. That pace of appreciation has happened three times in the past decade: the fall of 2007, the spring of 2009 and the spring of 2016. The Bank of Canada (BoC) provided fuel for the move with its abrupt turn on June 12 when Deputy Governor Carolyn Wilkins talked about stronger growth ahead for the Canadian economy and the need for anticipatory monetary policy. That took the market by surprise as the BoC jumped from the back of the tightening queue to the front of the line. Almost at the same time, the U.S. Federal Reserve (Fed) started focusing more on the reduction of the balance sheet, implicitly delaying the additional hikes. The currency markets took notice, switching attention almost exclusively to this new information and abandoning the previous focus on oil prices.

Our medium term views don't align with that of the Bank of Canada. A number of headwinds exist for the Canadian economy, and we have been taking advantage of the recent CAD strength and tactically adding to our foreign currency exposures across a number of our fixed income mandates. While we can't know for sure that this is the end of CAD strength in the short term, we believe it already provides good medium and long term opportunities.

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Dagmara Fijalkowski
Head, Global Fixed Income and Currencies (Toronto & London)
RBC Global Asset Management Inc.


A Hawkish Hike for the Bank of Canada

July 12, 2017

On July 12, the Bank of Canada (BoC) met market expectations by raising the target overnight interest rate by 25 basis points to 0.75%. Although the market was broadly expecting an increase, it is notable as it marks the first rate hike in roughly seven years.

The key debate going into this meeting was whether rate hikes should be viewed as purely an unwinding of the oil-shock-induced special stimulus from 2015 (with two 25 basis point hikes followed by a pause) or instead as the start of a bigger tightening cycle. Until today, the BoC speeches argued for the former; however, this announcement argues for the latter. We cannot assume this is a two-and-done situation anymore. We budget for a minimum of one further hike this year and are inclined to pencil in further tightening for 2018.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


U.K. Election ‘May’-hem

June 09, 2017

In April, U.K. Prime Minister, Theresa May called for a snap election three years ahead of the needed date. At the time, her Conservative party had a 20% lead in the polls and she wanted to consolidate power, grow an already-present majority, and gain an additional few years of potential negotiating time for Brexit. However, in an unfortunate British pattern, yet another Prime Minister has misjudged the public mood, calling for a vote that has ultimately swung badly against them. On the heels of last year’s surprise Brexit vote, the election held on Thursday June 8 has failed to deliver the expected majority for May’s Conservative party, resulting in a hung parliament.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


Moody’s Downgrades Six Canadian Banks

May 12, 2017

On May 10, Moody’s, one of the major credit rating agencies, downgraded the six main Canadian banks by one notch. The downgrade was a reflection of concerns that the banks were “more vulnerable to downside risks in the Canadian economy,” as a result of expanding consumer debt levels and elevating housing prices.

The initial market reaction was mildly negative, with bond yields for the Canadian banks rising a few basis points, bank stocks falling between 0.5-2.5%, and the Canadian dollar weakening modestly. In light of these developments we’ve put together some thoughts on portfolio positioning and the Canadian market as we look forward.

  • The loonie weakened modestly on the news, largely as a reflection of the view that the Bank of Canada will be on hold for a prolonged period than the market initially suspected.
  • From a fixed income perspective, in the current environment where interest rates are low and employment remains stable, there is no evidence of credit deterioration from the big six banks.
  • Moody’s statements around growth in Canadian consumer debt levels and elevated housing prices are concerns we share. From an equity perspective, we monitor these risks on an ongoing basis to understand what the resulting impact of stress – like a rise in unemployment rates or increased interest rates – could be on Canadian consumer balance sheets and thus on the banks and their provisions for credit losses. While a downgrade like this doesn’t change how we think about investing in these securities, it does highlight the importance of ensuring that the portfolio is not overly concentrated in one area of the market – something we spend a lot of time thinking about.
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Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.


Brexit: The Road to Exit

April 3, 2017

In 2016, British citizens voted in a historic referendum to exit the European Union (EU). On March 29, British Prime Minister Theresa May submitted a letter to the head of the European Council, officially triggering a two-year process of negotiations around the future of their trade relationship, the status of European residents who currently live in Britain (and vice versa), and the amount Britain will be required to pay to the EU in order to leave.

This article serves as a reference point and helps answer questions that may arise as the exit process grows more involved.

Highlights:

  • Britain will want to negotiate favourable trading terms, particularly as 45% of its exports go to the EU. Meanwhile, the EU is likely to bargain aggressively as the UK leaving the EU sets a very bad precedent for other countries that remain.
  • As Theresa May wrote in her letter, the UK is exiting the EU “but not Europe, and wants to remain committed partners and allies”.
  • The EU doesn’t want to punish Britain for this decision, but will want to draw a hard line that prevents the UK from receiving a better deal outside the EU than it received inside.
  • Much will depend on the years of negotiation that will now take place and the relationship that is subsequently established.
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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.


A Sleepy Budget for Busy Times

March 22, 2017

No one thought that Canada’s 2017 budget would match the punch of the 2016 edition given that the latter was the product of a newly minted Liberal government looking to put its mark on fiscal policy after a decade in the wilderness. Still, the 2017 budget is surprising in how little it delivers.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


Breaking Down Bonds in a Low Rate Environment

February 2017

Over the past few years, we’ve heard a lot in the financial press about the possibility of rising interest rates and the negative consequences this would have on bond portfolios. Given the extent of recent yield increases and resultant decline in bond values, investors understandably feel uneasy about the prospect of further yield increases in the months ahead. However, as we will illustrate, should yields continue to rise – which is far from a certainty – the implications for fixed-income investments are more favourable than they appear.

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U.S. Protectionism: Effects on Canada

January 30, 2017

Trump’s inaugural address and his actions during his first days in office reiterated his vision for more protectionist policies to help U.S. workers gain an advantage. Whether this is done through tariffs or renegotiating provisions surrounding existing trade deals like NAFTA, Trump has considerable leeway to act.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


The Second Rate Hike is Here, Now What?

December 14, 2016

For those who have been watching monetary policy closely over the last several years, the U.S. Federal Reserve’s (Fed’s) decision to hike the federal funds rate by 0.25% on December 14, 2016 might feel like déjà vu. In a move that was widely predicted, this hike brings the fed funds rate into a range of 0.50%-0.75%.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Resources


A Consequential Vote for Change

November 9, 2016

After a divisive and highly publicized election campaign, Donald Trump has been chosen to be the 45th President of the United States.

In this summary, RBC Global Asset Management’s Chief Economist Eric Lascelles, discusses what the outcome may mean for the U.S. economy, fiscal policy and financial markets.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.

Resources

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Current Perspectives

The Canadian economy has turned out to be the "little engine that could." Our latest commentary on the loonie.

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